A Professor Who Was Right About Index Funds All Along
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That being said, there are all sorts of problems with the incentives here.
Yes what you say does sound worrisome.
In the current situation, 34% of the money passively follows the active investors. That gives the active investors a 34% amplifier in their action.
I'd say the possible bad news is that the larger the passive pool, the less capital it takes to manipulate a stock price.
What was it Keynes said about rationality and being solvent?
^^
He said that though.
"The stocks were often described as "one-decision", as they were viewed as extremely stable, even over long periods of time.
The most common characteristic by the constituents were solid earnings growth for which these stocks were assigned extraordinary high price-earnings ratios. Fifty times earnings was not uncommon."
So somebody might purchase an index fund and think they are investing passively, they are really actively choosing a passive strategy.
EDIT: Or, to put it in EHM analogy terms, the number of people looking for loose change on the sidewalk will go down until there are few enough to support themselves from the money people actually drop.
But for example I've got a ton of money in cryptocurrency right now, it's my field and I've got way better-than-average knowledge about some of the coins. This helps me make informed investments, and I've been able to beat the passive rate by doing high risk investing into assets that were obviously priced incorrectly.
I'm not a day trader. I'm like the guy who goes about his way normally, but isn't afraid to pick up $20 off the ground when I see it. I spend some time looking for it, but it's not where I put most of my energy.
I doubt you mean that you actually have knowledge of when and how the price is going to change. Are you just betting on a general increase in value, or doing some form of pairs trading or arbitrage? How comfortable are you with rapid 30% price swings?
I've yet to be bold enough to short something overpriced but there are plenty of cases where something has struck me as obviously overpriced and within a year the price has corrected.
Game plan definitely involves waiting months at a time.
I would argue that this is already the case.
I invest solely in market-wide or top-75%-of-market-caps strategies (in stocks), because they're the only strategies that seem to accurately reflect my opinion of the markets:
1. The game is rigged.
2. People are dumb. (Especially me.)
Analysis of those strategies seems to indicate that they outperform even (traditional) index funds over long periods (likely because they're quicker to respond to risk/opportunity during transitional periods, eg, a new technology coming out). I like to think it's because my premises are true, but there's lots of other premises that lead to the same model of investing, so it's hard to say. (I think of them as a really diverse index fund, so at some level, it's really just the advice that Warren Buffet gave about long term investing.)
If everyone used this strategy the market would... basically do nothing once a company IPO'd, because everyone would hold a portion of every company forever (creating no selling once the initial bidding on IPO was over). That's not necessarily such a bad thing, because it would remove a lot of the noise that boards respond to while still incentivizing (healthy) long-term growth (because the only way the stock increases in value without trading and the current market gambling is from the underlying asset -- the corporation -- increasing in value, and distributing that as payouts or buybacks). There still is a valuation mechanism, however, because the passive funds do need to buy and sell when new stocks appear or someone is looking to change a position (which, is every IPO plus whatever is needed to generate cashflow from the portfolio), and how they negotiate that provides a value on the stock, even if they're just rolling shares they control between pools and clients of their own.
However, we'd still have the whole pipeline of pre-IPO private ownership, which definitely wouldn't settle in to the same kind of lock-in, but already uses the same kind of invest-across-the-board strategies.
So in short, I'm actually very unworried about the effects of main Wall St stock markets settling down due to most money being passively invested in long-term growth strategies, because it actually deincentivizes a lot of bad behavior on the part of trading firms. Much harder to execute your fraud if most people aren't going to react to it in any capacity, and won't be closing out their positions for 20-40 years, if ever. It's also perhaps easier to get a case to stick if you have basically every investor to choose a client from, because they'd all be impacted by those actions.
Seriously, index fund investing assumes an optimistic outlook. It assumes the managers of companies will do an OK job in the long term and the companies will grow. Index funds allow investors to participate in that growth without having a big chunk of it going into Mr. Johnson's pocket. A low fee burden turns OK company performance into acceptable retirement savings growth.
It's not a zero sum game. It's a slightly-positive-sum game. That means a lot of people can play and slightly win.
As for pricing the equities, the fundamental qualities of the businesses behind them are, even in the stock market casino of the 21st century, still important. Warren Buffet understands fundamentals. There's no reason a market dominated by index funds must ignore them.
There are two other aspects of successful index investing.
1. Diversification. Don't put all your money in one index. What if you have all your money in the NASDAQ index when the cultural narrowmindedness of Silicon Valley (the rule of young white brogrammers) catches up with them?
2. Disciplined rebalancing. Set a goal for diversification percentages: 60% growth equities, 20% growth-and-income, 10% nonUSA, 10% bonds for example. When your investment values move away from those percentages, sell the excess in one category and reinvest it in the other categories. This amounts to buy-low sell-high. It will serve as a ratchet to capture the upside and limit the downside.
Panic buying and selling is for the other guy. I'm grateful to that other guy; he's helped me set up a nice 401k balance.
It's more important to choose an allocation strategy and stick to it than it is to select the perfect allocation strategy.
Here's the hard part: determine your household's tolerance for risk. Are you willing to sit tight and not panic-sell if one or two of your funds decline by 40% in value? 20%? It's hard to know for sure how you will react until it happens. But, a decline like that means you should buy, not sell.
I mention "your household" because your spouse or other relatives might influence your risk tolerance. It doesn't matter if your anatomy is solid brass if your spouse insists on panic-selling. Part of the deal with risk tolerance is having conversations with family stakeholders about risk, to prepare for the inevitable downturn.
As the time grows nearer when you need to use the funds in your portfolio (retirement? college tuition?): reduce your stated risk tolerance once a year or so, and rebalance accordingly. This will help you lock in your gains even if something bad happens.
In the old, pre-junk-bond, days, "bonds" were considered lowest risk, "growth-and-income stocks" medium risk, and "growth stocks" highest risk. You can probably find index funds like those. Certainly you can find funds that invest in an index basket of low-risk bonds, or an index basket of dividend-paying (growth and income stocks).
"Unmanaged" is the key word to identify index funds. Vanguard, DFA, and others are the companies offering them.
One last thing: If you don't understand a fund's strategy, DO NOT INVEST IN THAT FUND. If the promises seem too good to be true, well....
Setting Warren Buffett aside, what you neglect to mention is that the stock market is both a primary and secondary capital market. We can speculate about how to speculate... whether to be passive or active... but this concerns only the functionality of the secondary market. There's still primary market functionality: companies issue stock to raise capital, buyback stock, and issue dividends. Thus, even if all the investors are passive, there's still always one active agent in the game: the company itself. And a capitalization-weighted index is ideally suited for this activity: it automatically shifts capital away from companies buying back stock (essentially, companies returning money to investors) to those issuing new stock (essentially, companies seeking to raise capital).
The bet was simple. Buffett would invest in a Vanguard S&P 500 index fund, and the hedge fund could do anything they wanted.
http://fortune.com/2016/05/11/warren-buffett-hedge-fund-bet/
http://www.npr.org/2016/03/10/469897691/armed-with-an-index-...
When full ownership is taken (his preferred option), the original management is almost always left in place. No rules or guidance are given. The subsidiaries work however they worked before acquisition.
That said, after reading through his 50 Berkshire Hathaway letters, the main lesson I drew was: own insurance companies which underwrite for profit under all economic conditions.
The Bank of America deal shows how good a deal you can get when you can put $5B where your mouth is
> In exchange, Berkshire Hathaway received $5 billion worth of preferred stock yielding 6% a year plus warrants to purchase 700 million shares of Bank of America common stock at an exercise price of $7.14 per share.
apologies in advance for linking to fool.com http://www.fool.com/investing/general/2015/08/19/how-much-is...
It helped that they were structurally inclined to build up cash. As Buffet explains, a booming share market is bad for him: everything is too expensive to buy.
So cash piles up, waiting for good deals of sufficient magnitude to arise.
When a bust arrives, there are bargains everywhere and a lot of money to buy into them.
The advantage he had in the GS preferred stock offering in 2008 was his ability to provide liquidity and his name - if GS told people that Warren was investing in them then it was a real vote of confidence.
His biggest returns for the first 3/4 of his adult life involved him going against the market when equities were out of favor and scooping up extremely large positions in the likes of The Washington Post, GEICO, American Express, Wells Fargo and Coca Cola.
His extraordinary history of stock picking is what enabled him to begin buying entire substantial businesses in the first place. The stock picking is what accumulated the capital necessary to buy Blue Chip Stamps and See's Candies. The Buffett partnerships for example were not built around buying up entire businesses and operating them for decades to reinvest the cash flow, and yet his returns were dramatic - regularly stomping the Dow - during those years precisely because he was such a great stock picker.
Buffett gets to do deals (on better terms no less) that others can't as a result of his celebrity and this has been the case for a long long time.
[1] In the same way Trump has but with a much better track record.
Ugh. Now we have npr teaches "law of averages" backwards
A good troll would have been to buy Berkshire Hathaway.
https://www.bloomberg.com/view/articles/2012-04-24/what-was-...
http://www.forbes.com/sites/randalllane/2012/03/26/warren-bu...
https://www.quora.com/What-was-the-fee-structure-of-Warren-B...
Won't the "tracking fee" of the index funds keep increasing, as a larger and larger fraction of the market is covered by them? Whenever a stock rises to X$, billions' worth of index funds will rush to buy the stock to rebalance their holdings, but clearly that should further raise the price of the stock (and they'll have to buy it at X+0.10, or X+0.50).
If a stock goes up, they don't need to buy more of it - the value of the shares they hold will increase to exactly the right proportion that they should have.
(There do exist other types of funds which try equally weight the stocks they hold, which means the fund has to rebalance when the stocks change price.)
Typically, cap-weighted funds only have to rebalance when individual members of the fund buy/sell - and they try to make it so people are buying/selling to those within the fund where possible to avoid having to do even that. The result is a very low churn, which is part of why index funds have lower fees.
Usually, the more assets an index fund has under management, the lower an index fund's fees get.
EDIT: and doesn't my above argument hold at the boundary? When a stock is brought into the S&P, suddenly all of the index funds need to stock up on it, further bolstering its price, no?
You're correct about what happens at the boundary, yes.
There's a well-known arbitrage opportunity for stocks that are known to be about to be brought into the S&P 500 (their prices DO tend to increase, I believe), if you want to research that. Like all publicly known arbitrages, I doubt you can make any money off it personally anymore though.
This is part of why the recommendation is not to use an S&P 500 fund, but something more like Vanguard's Total Stock Market fund, which includes medium/small-cap companies. Not that it's a huge deal, though - mutual fund companies are usually pretty clever about spreading large orders out over time.
http://www.theatlantic.com/politics/archive/2015/02/kill-sto...
So while it's still possible to raise capital by printing stock, this is happening less and less lately.
So when the bogleheads endlessly debate the perfect portfolio mix, they miss the point that they have zero exposure to private equity and other markets.
Index funds are better than managed funds, and are mostly better than individual equities. That doesn't mean that 100% of your money should be in them.
What could possibly go wrong?
1. Some people will beat the market, and regardless, someone has to try or there's a massive opportunity left on the table.
2. Indexing actually has more of a certain type of risk than passive investing, because if you take a huge loss for some period of time, you can't hedge it and cut the short term loss. You have to just hold. Active investing can be really valuable for folks as they enter phases of their life where big losses are unacceptable and they're willing to forgo some of the upside.
That is not quite right. When entering retirement, most people can expect to live for at least 20 more years, which means they should hold a non-insignificant fraction of their wealth in stocks.
Further, those who find themselves in the fortunate situation of being overwhelmingly likely to leave a significant estate to their children should consider investing their funds according to the life expectancy of the children, not their own.
This came up a couple months ago on HN [0], and to that scenario I say:
> Yeah, it's a bit like saying: "But what if all the animals in the ecosystem became helpless herbivores?"
This doesn't mean PASSIVE investors can't all do the same thing. In fact because risk over time is the fundamental reason passive investors make money, they can do exactly this. This isn't some loophole in the system. They are taking risk!!! It's amazing how many people don't understand this.
(edited)
Risky, but this is why people try to beat the market. This is the allure of gambling.
Unless there's a version of the EMH that doesn't believe in the speed of light.
By the law of the large numbers, some funds will be a success for quite some time. Just as some people do win the lottery.
I don't think it's surprising that a couple of funds have a great track history even if the game is just pure luck.
Related: one can be highly skilled and still lose to someone who is highly lucky.
But you can get determine a likelihood that they are lucky by monitoring their performance over a long time / lot of games. It's just that if you are evaluating a whole lot of people looking for a rare skillful person, you need a whole lot more time/games to be sure they aren't lucky than if you just had one person to evaluate.
"How do you distinguish between pure luck, actual skills, and illegal manipulation?"
Suppose there are 10 funds with the track record of RenTech. In 10 years, you wouldn't expect them all to be as stellar.
There are models to model the risks and the potential outcomes.
However, they are also at least generally, not making traditional 'investing' decisions. They are making statistical arbitrage bets - they are looking for instances where mispricing exists in the market, and they can make a guaranteed (statistically) profit by buying and selling statistically equivalent securities at different prices. The classical simple example is pairs trading: you notice that coke is always worth 10% more than pepsi, so when you see coke trading at 15% more than pepsi, you short coke and buy pepsi, betting that the gap will close to its traditional norm. Now, what they are doing is obviously substantially more complex and rigorous than that, but that is its flavor.
You can guess a coin flip 5 times in a row. A few people out of a hundred will do so.
But you cannot get significantly over 50% correct on millions of coin flips. That's not luck.
Your mistake is treating each trade as an independent event. But in reality all those trades may share a single methodology which can be invalidated by a single unprecedented market change. Yeah, a fund is a perennial winner until it's not. You can call it being unlucky or you can say they went from being smart to stupid. It doesn't really matter what you call it, the point is past performance is no guarantee of future returns.
They largely are.
The people who fall under your criticism are the old school stock pickers. For instance, people who've grown up during the long decline of inflation and rates might have hit a wall over the last few years. A lot of those guys were essentially riding the same wave over multiple trades.
But the kind of trading done in stat arb is largely independent of such long term trends. They change around their positions so often that there's hardly any regime that they are biased towards. High vol? Been long and short. Rates going up/down? Been long and short. Economy? Been long and short.
Sure, there might be some hidden regime that we've yet to hear about, that's possible. But there's quite a difference between the quantitatively astute funds and the other long-lived ones.
Here's a couple of stand out items I cherry picked for no particular reason what-so-ever...
According to the Center for Responsive Politics, Renaissance is the top financial firm contributing to federal campaigns in the 2016 election cycle, donating $33,108,000 by July.[33] By comparison, over that same period sixth ranked Soros Fund Management has contributed $13,238,551.[33]
On 25 September 2008, Renaissance wrote a comment letter to the Securities and Exchange Commission, discouraging them from implementing a rule change that would have permitted the public to access information regarding institutional investors' short positions, as they can currently do with long positions. The company cited a number of reasons for this, including the fact that "institutional investors may alter their trading activity to avoid public disclosure".[32]
At this point, because of Renaissance Technologies' success, their fees will likely offset the gains they'll net you.
I think recently their performance slipped a bit and they started taking money again, but the above point was true for a long time.
Renaissance is a company which manages hedge funds. They're famous because their main fund, Medallion, has done exceptionally well. The only investors in Medallion are Renaissance employees; it's capacity is limited, so that even employees can't generally invest as much as they'd like. Renaissance also manages several other hedge funds, which have much higher capacity, and have both employee and outside investors.
First of all, I have to ask why the equity market should be your benchmark. And if it's because you think the market generally goes up (not obvious) why don't you just get leverage on your ETF, so that you basically always beat the market?
There's another way to beat the market. Smart beta products do variations of it, but here's a concrete one. Basically my brother had some class about markets and needed something fast, so I just told him to take the S&P 500, lop off the top 25% of stocks measured by beta, and scale up the rest. Ta-da. You'll probably find costs are high, and there's a bunch of admin, but I suspect there's now a bunch of smart beta ETFs that do the same thing.
As for the EMH, I doubt that it's true. The problem for ordinary people is you won't be allowed to invest in strategies that are very good.
It makes sense for people on the inside: suppose I have a strategy, with a Sharpe > 5, that uses very little capital. What am I going to do with that? Get investors? No, I'll borrow money and take the profits myself.
What does that leave? A bunch of strategies with much less attractive risk profiles. If I have a Sharpe of around 1, I'm expecting long flat periods. I'll have to get investors for that. But investors are fickle. One bad year and they flee, even though you should have one every few years. You could easily have a couple of losing years with that kind of Sharpe. So what do we find with that type of shop? They're made of marketing. Box-checker salespeople who know what to say to institutional investors. IIs who buy IBM. Or are quick to jump the gun. /rant
[1] http://www.joshuakennon.com/sp-500s-dirty-little-secret/
60% US 30% Int'l 6% REITs 4% Gold
All of this can be bought with low cost mutual funds.
> Vanguard mutual funds & ETFs (exchange-traded funds)
> There are no commissions when you buy and sell low-cost Vanguard mutual funds and ETFs.
> If you buy and sell the same Vanguard ETF® in a Vanguard Brokerage Account more than 25 times in a 12-month period, you may be restricted from purchasing that Vanguard ETF through your Vanguard Brokerage Account for 60 days.
That said, mimicking could entail more than 25 transactions per ETF per year. I don't know that we really have the ability to predict the number of trades that the robo-advisor will do from the outside though.
[1]: https://investor.vanguard.com/investing/trading-fees-commiss...
[1]: https://support.wealthfront.com/hc/en-us/articles/209353626-...
[1] https://personal.vanguard.com/us/funds/snapshot?FundIntExt=I...
[2] https://about.vanguard.com/what-sets-vanguard-apart/why-owne...
Stocks are hyper-inflated by QE and near-zero rates. When all that stops it will pop violently. And sooner or later, they will have to stop. This affects bonds even more, of course.
You will pay a lot more but it'll be a one time cost. Whereas ETF fees are a yearly one.
> Also easier to rebalance in a diversified portfolio.
The strategy I was talking about means you should never have to do that.
I meant one time per line, not per portfolio.
> it doesn't scale down.
It scales down just fine if you're willing to accept that you're going to pay a lot in broker fees, with the only consolation that you'll pay them only once per line in your portfolio.
If you have say 500 stocks and pay like $10 in broker fees per stock, in the end you'll pay $5000. That's not the end of the world for a long term investment.
If you only buy each stock one time. Which is absurd if you want a balanced portfolio you would need to buy a little bit of all 500 stocks a lot of times. A ETF lets you do this cheaply.
Retail brokers typically charge a commission per trade. If you want to buy many different securities ('cuz diversification), and you don't have a whole lot of money to invest in the first place, you're going to end up paying a large percentage of your initial investment in commission. The exact amount will depend on your broker and how much money you had to begin with, and how many stocks you're diversifying among. That means you might be starting from a fairly deep hole to have to dig yourself out of before you're truly earning a positive return.
By contrast, with ETFs you only have to pay commission on no more than a handful of trades to get a well-diversified initial investment laid out. Your expected earnings rate might be fractionally lower, but since you're starting from a much shallower hole, you might have a decent head start compared to buying a well-diversified portfolio individual stocks.
So then you've got two theoretical curves describing how your wealth might grow, and whether one is more favorable than the other depends on whether those two lines are likely to intersect at a point that comes before your investment horizon.
Then you can throw in still more complications that, IMO, can make ETFs still look quite a bit more favorable than stocks for most investors. One is that many retail brokerages (Vanguard, for example) will let you buy a selection of ETFs for zero commission. That's a gift that keeps on giving, since it dramatically reduces the cost of making smaller investments more frequently.
Another is that picking stocks is a time-consuming process - you have to spend time learning how to do it, and then you have to spend time researching stocks. If you agree that time is money, then you should probably be including some estimate of the value of your time into the formula. You want your expected returns from manually selecting a portfolio to be great enough to justify your time. Which is yet another calculation that is going to be heavily influenced by individual factors, particularly how much money you have to play with, what your current earnings are, and most importantly, whether or not you think it's fun to pick stocks.
Just buy them all. Or pick them randomly. Let me remind you that this thread started with an article about the guy who wrote about the blindfolded monkeys.
Probably there are other optimizations with a better time-money tradeoff than manually managing your portfolio.
Personally, I use Betterment (a competitor to WealthFront) simply becasue I can set a target asset allocation, and they will balance my portfolio accordingly. The tax loss harvesting capabilities that both companies offer are really interesting, theoretically, but there is no empirical evidence either way as to whether it actually will save you money in the long-run. Before betterment, I invested in mid-large cap index funds from Vanguard.
For example: If you know you need to use $200,000 within next two years, you might want to start moving part of that sum slowly from stock index fund into other less volatile assets (like bonds etc).
You can do that for yourself approximately without knowing about theory, but if there is cheap automated system that can provide personal solution based on portfolio management theory with few bucks, it's can be worth of the small sum they ask.
Ah, instead he believes he can talk "the vast majority of investors" into believing that they can significantly beat "average returns"? Hmm. Maybe in Lake Wobegon.
IIRC the index fund idea, W. Sharpe's work, etc. DOES need stock pickers also doing their best. Or, for anything with any promise in public a stock market, there has to be some smarts in there someplace. The reason throwing darts works so well is because of the stock pickers with the smarts working hard to buy the winners and sell the losers.
In buying a stock, you're buying exposure to a number of factors that affect the stock price: the company, the money flows into/out of that company's industry, and the flows in/out for stock market as a whole. In buying an index you get a more pure exposure to the stock market as a whole. When indexes do well, its only because money is flowing into it from other asset classes (or "money printing" by central banks).
Whether we should accept Efficient market hyposisis as explanation of Indexes beating pros, is a little more complicated. Yes, its true everyone has access to the same information. In fact, it's illegal to trade on insider information.
However, when Indexes beat pros, people are quick to say, 'yep.. Efficient market..', but Indexes have support that the individual stocks or baskets don't have. A pledged support by the Fed to print money to prop it up.
Take Wells Fargo. Maligned in the news, down stock price, but still a powerful bank. Buying the stock - not a irrational decision. But, will the Federal Govt let them go down? They didn't AIG, but who knows. Now imagine the Index crashes, the Fed steps in. Indexes have the advantage here.
Passive investments wherein the investor takes zero interest in these investments are and have always been a terrible idea, and nothing in modern history has facilitated this more than index funds. When you give a friend of a friend $10,000 to start a company, do you just hand it over no questions asked and with no follow-up? Or do you try to get engaged with your investment? Make sure the CEO isn't sitting on his ass collecting a paycheck? Scrutinize it for potential frauds?
Well, that's what you do in an index fund. Except it's not even a friend of a friend that you're trusting. It's some group of people who likely live thousands of miles away who may or may not have an opiate or alcohol addiction or are complete sociopaths or are just regular humans who know how to legally take advantage of you when you aren't paying attention.
You want to know why CEO pay is so high? It's because CEOs have no accountability for raising their pay when investors aren't paying attention to what they're doing. You want to know why CEOs are taking short-term action to boost stock prices at the expense of long-term viability? It's because they care about the short, you care about the long, and you have no voice when you're in an index fund. You want to know why CEOs are issuing debt to do stock buybacks? To empire build by paying too much for their competitors? To play accounting games to boost short-term earnings?
Index funds are the tail that's wagging the dog, and they are going to be a disaster. And unlike derivatives, which can mess with stock prices but largely leave the fundamental structure of the company untouched, the dog that's being wagged here is the viability of globally important corporations that we depend on.
They were fine when 5% of the market just piggy backed onto the other passive (though attentive) investors. But now passive and inattentive investors are a massive proportion of the market.
For one thing, there are still plenty of active investors around. The fact that the less active investors around, the easier it is for them to make returns, will help the market stable and full of "enough" investors.
It is absurd to worry right now about not having enough finance professionals, considering just how many people are in the market.
In terms of what's best for a single person deciding where to invest money right now, indexing seems to provide the best opportunity. It's clear that most investors will not spend the requisite time tracking companies, nor should they considering the benefit of specialization.
An I am not advocating for more finance professionals. Paying active managers to invest for you can cause the same problems I'm talking about. I'm advocating for personal responsibility and attentiveness.
Honest question. I'd answer no, considering that even trained professionals aren't so amazing at it.
Example 1: track the Google rankings of companies that rely a lot on search engine traffic. see if any have dropped a lot from a major algorithm change (i.e. Demand Media)
Example 2: use the Facebook graph API to do the same for companies that rely a lot on Facebook for traffic.
Example 3: at the end of every month create a profile on weightwatchers.com. Note the user id number. Use this to extrapolate the number of users that signed up every month.
Example 4: track the number of websites that installed a JS script for vendors like Hubspot.
Example 5: every month scrape Ecommerce sites and track the increase % of reviews for major brands.
That would depend on the company and the agreement we make on how I'll get compensated (will I own a %, etc)? That agreement is clear when investing in a fund. Once we have an agreement, my only concern is he/she keeps their end of the deal.
>Make sure the CEO isn't sitting on his ass collecting a paycheck? Scrutinize it for potential frauds?
Unless you're buying your own stocks, this is a potential problem with every fund, not just index funds.
Complete abstraction. Always has been, this is just the codification of it. The future catastrophe isn't so much the companies becoming more irresponsible than they already are, because they never particularly were. The catastrophe is more 'the concept of capital becoming meaningless', a sort of conceptual Reichsmark inflation where the numbers we talk about steadily become meaningless and absurd.
Nobody knows this, and it is false. Index funds seek to match the market return, less fees.
If index funds are so bad and destroy companies, you would expect them to not get good returns.
But that's not the case, they get great returns!
Since equities have seen great returns post-08, broad-market equity index funds have also seen great returns.
I'm not sure I get your point. Many active funds beat the S&P 500 over 5 or even 10 years.
So it is a self-correcting system, not a self-fulfilling prophecy.
So the index funds have the full force of the US Government watching over them. This is why economics is not just some math puzzle but often more about politics and sociology.
The prices of stocks are one of the most forward-looking macroeconomic measures that we have available to us. The better we get at improving long-term economic growth, the higher stock prices will go, other things being equal. So basically, if you have good policy, stock prices should always go up (in real terms). If the Federal Reserve were perfect at preventing recessions and everyone knew it, stock prices would be higher.
While you would probably not want to make stock index growth the target of monetary policy because of Goodhart's Law, it is very reasonable to take it into account as a part of a forecast of how well your policy is working.
(without being deeply familiar with the history, I think the Vanguard 500 fund must have been one of the earliest index funds anywhere, if not the very first)